What would a no-deal Brexit look like?

Throughout the Brexit negotiations, the media have struggled to describe how a no-deal Brexit might work.  Understandable really, as it all depends.  On the actions the parties take; the responses to each other’s actions; and adaptation to new policy realities.

The most recent effort from The Times (see here) sacrificed clarity for comprehensiveness, listing outcomes ranging from the far-fetched (that aerospace companies will abandon their investments and skilled workers and decamp to Europe and China) to the near-inevitable (that volume car manufacturing in the UK is facing serious restructuring). But in speculating on outcomes, it might have missed a chance to explain the choices driving them.

Let’s hazard a guess at how things might go on the first day.  It’s clear from The Times piece that the immediate impact depends on governments: their deliberate choice or incompetence will determine the level of disruption. Grown ups have made clear that the most lurid scenarios will not be imposed: planes will land, passports will be recognised, medicines will not be stopped at borders.  Day one could be less traumatic than people have been led to believe.

This makes sense.  The EU’s actions suggest it sees no-deal as another step (albeit less desirable) in establishing a new relationship. Its objectives throughout have been ambitious: it wants to keep Britain in its market sphere by imposing its rules and regulations, preferably with the chance to whittle away British capability in areas like finance and tech, and making as much use of British cash and capability as it can. In return it offers easier access to its goods and services markets than the rest of the world. By insisting on regulatory conformity, it rules out a large measure of free trade and competition policy for the UK.  No-deal will not change these objectives.

So we might expect the EU to impose measures calibrated to pressure the UK and improve the position for ongoing negotiations. For example, default third-country tariffs, regulations and paperwork could be imposed on British exports to Europe. Temporary waivers may be granted in some costly or politically sensitive areas (eg, medicine licensing or road haulage).  Some problems will be left to fester for more advantageous negotiation later (see the EU’s rejection of a British request for mutual recognition of the rights of citizens living in each other’s jurisdictions in the event of no-deal).

If day one goes without the predicted disaster, the British government will be relieved. But it still has the hardest decisions to make. The critical decision it faces is the choice of long-term economic policy setting:  does the UK break away decisively from the EU paradigm and move towards free trade with the rest of the world, or does it keep EU tariff and regulatory settings.

In terms of long-term growth and productivity, free trade is the better option.  But it will accelerate adjustment, compounding the pressures on weak and protected industries (like volume car production and steel making) which will already be hurting from the new EU trade barriers. In the long run, strong producers (like the luxury car manufacturers), workers in the restructured supply chain and consumers benefit, but it will be painful getting there. The government will probably face a succession of ‘death-of-industry’ structural adjustment crises, perhaps very soon.

If the British government funks the free trade choice, its other option is to continue negotiating for trade with Europe on Europe’s terms. For an example of how this works, see the row between the EU and Switzerland. The Swiss are reluctant to align their laws automatically with those of Europe, so the EU has threatened to revoke the ability of (compliant) Swiss brokers to transact on EU markets.  (The Swiss rather hoped that this right was secured when they paid the EU 1 billion euro back in 2017.)   The British government (and electorate) might think that the gains from this sort of relationship are less than the costs.

If, on the other hand, the British government goes down the free trade path, post-Brexit negotiations will assume a different character. Trade, whilst important, might not be the overriding element.  Because the UK will not be trying to buy membership of a restrictive trading bloc, individual deals – in areas like citizens rights, fishing access and development contributions – are more likely to be struck, based on mutual interest and reciprocity.

And in this sort of process, the parties’ approaches may diverge even further.  The EU shows every sign that it will hang tough to protect the purity of its ‘social model’ and its political unity.  Meanwhile, economic incentives will tempt the UK to open further to world trade, hoping to generate more foreign investment (as happened in the 1980s when the Thatcher government championed competition). If a no-deal Brexit sharpens the difference between the EU and UK economic models, it will provide a most interesting test of superiority.

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